Recordkeeping is an all-too-familiar chore for many retailers. Often ignored or neglected, however, are the records that are so essential in aiding the operation’s growth and profitability. Records are necessary to qualify for needed financing and invaluable when preparing the operation’s financial statements. And, don’t forget their importance in backing up tax deductions.

The IRS requires a business to keep records. But what records should be held and for how long? The answer can be as simple as keeping tax returns forever and backup documentation for three years. Quite a few other records, however, have extremely different requirements.

Today’s Recordkeeping Basics

Naturally, there is more to recordkeeping than the basics. Consider the special recordkeeping necessary for write-offs, tax credits and transactions such as:

Net Operating Losses are often used up relatively fast, but not always. Many businesses suffered losses because of the economy. Since those losses may be carried over to offset future tax bills, all documentation needed to prove that loss, not merely the loss year’s tax return, means keeping proper records. Documentation proving the loss, including accounting records, invoices, checks and bank statements, may be required.

Business Credits such as the Work Opportunity Credit (WOTC) for hiring workers from target groups or the general business credit along with carryovers of other unused tax credits, require records. Although credits offset taxes, if there is little or no income, there may be little or no tax bill to offset. If the credit can’t be used currently, it might qualify to be carried forward. The rule here is similar to that of the net operating losses, although only data related to the amount of the credit and how much was utilized is necessary.

Most property-related records should be kept until the IRS can no longer audit that year’s tax return. That means purchase and sales invoices, real estate closing statements as well as cancelled checks or other documents that identify payee, amount and proof of payment or electronic funds transferred.

The purchase of fixtures, equipment or other assets means saving the purchase documentation along with records of improvements made for three years after its disposal. If the asset is sold, some or all of that depreciation may have to be recaptured or paid back. And, don’t forget those records will also be needed to calculate gain or loss when the property is eventually disposed of.

Installment Sales, those transactions where payments — and the portion of the gain attached to each payment — may be reported on the operation’s future tax returns five, 10, 20 years or longer. Not only will the property’s original basis be needed, but records documenting improvements made, depreciation taken and a copy of the sale document are also necessary.

The basis or book value of a business’s property held by Owners, partners or S corporation shareholder’s, is used to determine whether a sale or gift of that property will be subject to a tax bill. If a gift, as one example, is more than $19,000 (up from $18,000 in 2024), a gift tax return may have to be filed. Those in partnerships, LLCs or S corporations have a basis equal to the original investment plus any loans and profits but less any distributions or losses.

The majority of retailers are careful to put acquired assets on the books and take a deduction for depreciation. All-too-often, however, when assets are sold, scrapped, converted to personal use, destroyed, etc., they are not always retired. If the asset is sold for more than its adjusted basis (generally cost less depreciation taken) it will result in either an ordinary or a capital gain. If it’s disposed of for less, an ordinary loss could result.

Never All-or-Nothing

Receipts, especially those for small amounts, often get lost. That’s why the IRS has special rules that generally make receipts for expenditures under $75 unnecessary. Of course, all business deductions are fair game and can be questioned by auditors. 

In the event of an IRS audit, for the IRS to uphold a deduction under $75 without a receipt, a record of the amount, where and when it was made and the purpose of the expense is required. With meal and entertainment expenses, a list of those present and a record of what was discussed is usually required.

Although some retailers know the requirement that records must be kept, they believe they can create them later — often only when the IRS calls. Unfortunately, it’s not as easy as it sounds, and most IRS agents and tax court judges can spot non-contemporaneous logs and receipts.

Recapping the Basics

It can’t be mentioned enough: When it comes to income tax returns, copies of those filed returns should be kept indefinitely. Past returns can help in preparing future tax returns.

The IRS can audit tax returns until three years from the date it was filed or when the return was due, whichever is later. However, if a substantial understatement of income of more than 25% is discovered, the period is extended to six years. With fraud or failure to file a return, there is no limit.

Supporting documents means different things to different people. Supporting documents generally include any records related to business expenses, asset purchases, sales, payroll, investments and more — all subject to a number of basic rules including:

• Always keep receipts, bank statements, invoices, payroll records and any other documentary evidence supporting an item of income, deduction or credit shown on the operation’s tax return.
• Most supporting documents need to be kept for at least three years.
• Employment records must be kept for at least four years.
• If income was omitted from the return, keep records for six years.
• If the operation deducted a bad debt or worthless security, records should be kept for seven years.
• Go paperless, store everything electronically and make a backup.
• Even if a document is not needed to prepare the operation’s taxes, it might be needed for something else. When in doubt, keep it.

Safe and Accessible

In addition to keeping records, there is the problem of keeping them safe and accessible. Failure to take steps to prevent a breach could prove costly. It could mean liability to customers, suppliers or employees and, in many cases, substantial fines. At least one state has passed legislation imposing fines for a breach of a customer’s information.

Which brings up another tried-and-true strategy: If a business record is truly not needed any longer, shred it. This is essential to protect the business, its employees and customers from identity theft. After all, failure to take steps to prevent a breach can prove costly for every-sized business.

Backing Up the Backup

Many retailers routinely make PDFs of important papers and records or store backups in a safe place. But what happens if the original papers are exposed, scattered or lost in a flood, tornado or similar catastrophe? If records are stored someplace that is vulnerable, at least put some roadblocks, such as a safe, in place to deter crooks or combat natural disasters.

As mentioned, records, such as receipts, cancelled checks and other documents that support an item of income, a deduction or a credit appearing on the return, must be kept as long as they may become material to the administration of our voluminous tax laws. 

Manually kept records satisfy the tax law as long as they are accurate and can be understood or explained if questioned. However, most tactical retailers today are going paperless and storing everything electronically.

According to the IRS, electronic records are just as official as the paper originals. Utilizing a software program, math errors are eliminated and profit and loss statements, along with the operation’s other financial statements, can be produced with the click of a button. 

The End Game

Without records, how can any owner or manager monitor the progress of his or her business and guide it to increased profits and success without records? Obviously, keeping good records is critical for every business — and also critical to the IRS. Well-organized records make it easier to prepare the annual tax returns and help provide answers should the return be selected for scrutiny by the IRS. 

If the IRS finds the records of a business inadequate, it can reconstruct the operation’s income by one of several methods. Even more painful, the burden of proof is on the taxpayer to show the IRS is wrong. Furthermore, that proof must be with a preponderance of evidence — a steep uphill climb.

If records are lost, the retailer must not only show they were lost in a disaster, but there must also have been steps taken to reconstruct those lost records. That includes requesting bank and credit card statements, invoices from vendors, etc. 

Obviously, every owner, partner or manager of a tactical retail business hoping to comply with today’s increasingly complex recordkeeping required by everyone from suppliers, lenders, the government and, of course, the IRS, should consult with a professional.